Hard drive supply issues weigh on Dell's Q4 earnings

Dell's Q4 profit drops by 10 percent year over year due to weakness in the consumer market

By Agam Shah | 22 February 12

Dell's fourth-quarter earnings were weighed down by weak consumer PC sales and by pricing and supply issues caused by the floods in Thailand, Dell said on Tuesday.

For the quarter ended Feb. 3, Dell reported a net profit before one-time charges of US$913 million, down 10 percent from the same quarter last year. Earnings per share were $0.51, compared to the consensus estimate of $0.52, according to analysts polled by Thomson Reuters.

Dell was challenged by pricing and supply issues related to hard drives, especially in its consumer PC business, said Brian Gladden, chief financial officer at Dell, on a call to discuss the earnings with media. Dell received the supplies it needed but prices went up significantly during the quarter.

The costs of other components such as memory and LCDs were favorable and helped offset some of the impact, Gladden said. But the company had difficulty securing enough high-capacity drives for its more profitable, higher-end products.

"The disruption in supply will continue into the third quarter," Gladden said.

Gladden provided the example of the high-end XPS laptops, which are hard to sell with hard drives of only 320GB. Overall, Dell absorbed roughly $150 million in costs related to hard drive pricing issues, Gladden said.

"That played out across the portfolio," he said.

Dell's revenue for the quarter was $16 billion, growing by just 2 percent year over year. Analysts had expected revenue of $15.9 billion. Including one-time charges, net income was $764 million, an 18 percent drop compared to last year, and earnings per share were $0.43.

Revenue for the consumer segment was $3.2 billion, down 2 percent, Dell said. There was weak demand for consumer products in the U.S., but revenue from other countries combined grew by 10 percent, Dell said.

Dell has been trying to reduce its dependence on consumer PCs, where profit margins are lower, and expand in its higher-margin enterprise business.

Consumer products accounted for about 20 percent of Dell's revenue in the fourth quarter, down from 21 percent a year earlier. Enterprise revenue was 30 percent, the same compared to last year.

Dell will continue to focus heavily on its enterprise business in the year ahead, Gladden said. It poured billions into research and development for server and data center products last year and will continue to do so in fiscal 2013, he said.

Dell invested $2.6 billion in enterprise-related acquisitions in fiscal 2012, the business year that just ended for Dell. They included networking company Force 10 Networks, storage company Compellent and security company SecureWorks.

The company's enterprise business could receive a boost with the launch of the PowerEdge 12G line of servers in the current calendar quarter, said CEO Michael Dell. The servers will have Intel's upcoming Xeon E5 processors, based on the new Romley platform, a long-awaited update to Intel's 5600 series processors announced in March 2010. Dell is hosting an event in San Francisco Feb. 27 to announce new servers and other enterprise products.

The servers will provide I/O improvements through technologies such as solid-state drives and 10-gigabit Ethernet, which could help deploy virtualized machines faster. Dell is simplifying systems management in the servers and also integrating technologies from recent acquisitions such as Force 10.

"We're changing the whole sale from being an individual product to effectively selling the whole data center," Michael Dell said.

The company sees a lot of opportunity in software used to build cloud infrastructure and virtualize data centers, he said. The company earlier this month said it was forming a Software Group, which will take charge of enterprise software offered in end-to-end products. The company hired former CA CEO John Swainson to run the group.

For the first fiscal quarter of 2013, Dell said it expects revenue to decline about 7 percent sequentially.